Highest penalty awarded for misleading ‘free range’ claims

On 25 July 2017, the Federal Court ordered an egg supplier to pay a pecuniary penalty of $750,000 for falsely advertising eggs as “free range” and for engaging in misleading or deceptive conduct in so doing.

ACCC v Snowdale Holdings Pty Ltd (No 2) [2017] FCA 834

On 18 May 2016, the Federal Court held that Snowdale Holdings Pty Ltd (Snowdale) contravened ss 18, 29(1)(a) and 33 of the Australian Consumer Law (ACL)[1] in that it supplied eggs during the period 8 April 2011 to 9 December 2013 described as “free range”, when that description was false; and had falsely advertised eggs as “free range” eggs when they were not. Further, it engaged in misleading and deceptive conduct by making false statements on its website in describing eggs as “free range”.

The parties jointly proposed a pecuniary penalty of $500,000 and costs of $300,000. The Court provided a tentative view that the proposed penalty was too low and invited the parties to further consider the question in light of the Full Court decision in ACCC v Reckitt Benckiser (Australia) Pty Ltd[2] (Reckitt Benckiser). In response, the parties jointly proposed a penalty of $750,000.

Referring to recent High Court authority,[3] the Court stated that it was “highly desirable” for a court to accept an agreed penalty, but was not obliged to do so: [37]. The Court had to be satisfied that the pecuniary penalty was appropriate: [39].

The Court accepted that the revised agreed penalty was an appropriate penalty. However, it acknowledged that it would have imposed a higher amount to reflect the extent of the loss caused to consumers and the financial benefit Snowdale derived: [158].

This case demonstrates the significance of assessing the loss to consumers and the gain to the contravening party by the making of false, misleading or deceptive statements (see [45]-[46]). Referring to Reckitt Benckiser, the Court noted that even if it is not possible to accurately assess the loss to consumers, the Court should draw inferences from the evidence. Based on approximately five million cartons of a dozen eggs sold as “free range”, consumers paid a premium of between $5 – $8.5 million for a product which they did not receive: [61]-[65], [134]. The Court estimated Snowdale derived increased gross revenue of between $1.7 – $1.9 million from sales to retailers: [68]-[75], [135].[4] This fact troubled the Court most in deciding whether the penalty was appropriate: [152].

It was of no utility in this case to assess the appropriateness of the penalty by reference to the maximum penalty for a contravention (being $1.1 million): [41]. The Court did not accept the contravening conduct should be characterised as a single course of conduct. The distribution of each carton constituted a single contravention. Thus, following the Full Court in Reckitt Benckiser, the maximum penalty would amount to trillions of dollars: [42]-[44].

The Court considered the appropriateness of the penalty in terms of the parity principle. Of the nine Federal Court judgments from 2010 to 2016 brought by the ACCC in relation to the use of the term “free range” to describe poultry meat products or eggs, the highest penalty was $400,000. The highest penalty imposed in respect of “free range” eggs was $300,000: [143]-[146]. Despite the limitations in comparing penalties, the ACCC submitted that as a public regulator and model litigant it did not press for penalties of an amount which may be viewed as inappropriately inconsistent. In weighing up the various factors, the Court was persuaded that the agreed penalty would fulfil the requirement for specific and general deterrence: [157].

It was significant that Snowdale, despite being a private company, was one of the largest suppliers of ‘free range’ eggs sold on a retail basis in Western Australia with total gross trading profits of over $20 million from egg sales during 2012 to 2015 (see at [53]-[59], [83]-[91] and [142]).

The contraventions occurred with the knowledge of senior management. Further, Snowdale did not have a compliance program and did not make available any training or education in respect of compliance with the ACL: [95]-[96], [138]. The Court found as an aggravating factor that from the date when the substantiation notice was issued, Snowdale’s conduct was deliberate in that it courted the risk that its conduct contravened the ACL: [123] and [137].

The mitigating factor in Snowdale’s favour was that it had not contravened consumer legislation in the past. Further, whilst Snowdale vigorously defended the proceeding, it cooperated with the ACCC after delivery of the judgment on liability: [97]-[102], [140]-[141].

In addition to the pecuniary penalty, the Court ordered that Snowdale:

pay the ACCC’s costs in the amount of $300,000 (at [6], [159]);

be prevented from representing that its eggs are “free range” unless they are laid by hens that are able to go outside on ordinary days, and most of which actually go outside on most days (at [2], [23]);

[2] (2016) 340 ALR 25 (delivered on 16 December 2016). In Reckitt Benckiser the Full Court allowed an appeal on penalty by the ACCC from a decision of the primary judge who ordered a penalty of $1.7 million. Reckitt Benckiser labelled, marketed and sold “Nurofen” as well as four other purportedly different Nurofen pain products representing that these were “targeted” to different types of pain, when in fact were materially the same product as standard Nurofen and did not target specific pain. The premium charged for the specific pain products during the relevant period was approximately $25 million. The Full Court found (at [98]), that the primary judge had erred in the way in which he had treated the loss to consumers as a relevant consideration and imposed a penalty of $6 million.